Our Plan to Accelerate Our Second Mortgage

by Kevin on September 16, 2009

We’ve lived in our home a little over two years. We bought close to the housing bubble peak and were able to swing putting just five percent down as a down payment. We got a traditional 80% first mortgage and the rest was put into a 15% second mortgage.

Looking back buying our home could be seen as a mistake. We thought we would live here for quite some time, but have recently decided we want to move back closer to our families. Putting only five percent down puts us in a bit of a bind in terms of trying to recoup any of the money that is tied up in our house.

Thankfully we don’t live in an area where home prices doubled or tripled during the housing bubble. We haven’t experienced a drop in the value of our home like those in Vegas, Miami, and California have experienced. Our home value has dropped a few percentage points instead of 50% like other areas of the country.

Paying Off Our Second Mortgage with a Plan

As soon as we bought the house our goal was to put additional money into each payment on the second mortgage so we could pay it off faster. Much faster. As in… taking a 30-year second mortgage and turning it into a 5-year second mortgage.

Being highly leveraged in our home (owning just a small portion) should make us a foreclosure risk. There is one key difference between our situation and others that are being foreclosed on: we bought a house we could afford.

We didn’t stretch ourselves and hope that our incomes would go up to cover our living expenses. We can afford our mortgage payments while keeping up our other saving goals and adding additional principal to the second mortgage.

With that in mind we devised a plan that wouldn’t drastically impact our saving goals, but still allow us to pay extra onto the second mortgage.

Accelerate Your Mortgage with Extra Principal

The core of our plan is simple: put extra money into each second mortgage payment. That’s it. It isn’t complicated. With other mortgage acceleration programs (that cost you money) the core of the savings revolves around you paying extra principal on each payment.

We get to keep whatever one of those other mortgage accleration programs would cost us, do it ourselves, and still save a significant amount of the interest.

Extra Mortgage Payments Accelerate Our Mortgage

Without getting into specific numbers we started dumping a healthy amount of money onto each second mortgage payment. The income I earn from blogging also gets thrown at the payment.

I’ve written about mortgage acceleration programs in the past. I don’t like these programs because the offers I have received in the mail charge you money for something you can do yourself.

Thanks to our own basic mortgage acceleration plan we are on track to pay off the second mortgage in three years. It has taken a lot of effort. It isn’t fun watching money leave our account and go to our mortgage company.

But the interest we are saving is significant — we will end up paying about 10% of the total interest we would have paid if we kept the second mortgage for the entire 30-year term. In other words we are saving 90% of the cost of our second mortgage.

Paying Additional Avoids Being Upside Down

Paying off the second mortgage is good for several reasons.

  • We save a lot of interest we would otherwise have paid
  • Once paid off our cash flow will increase because we will have one less payment each month
  • We will have 20% equity in our home and avoid being upside down if we need to sell the house

It should be about 12 months from now when we pay it off. I’ll be sure to write another article celebrating that awesome day!

{ 6 comments }

Evolutin of Wealth September 17, 2009 at 4:32 am

“Being highly leveraged in our home (owning just a small portion) should make us a foreclosure risk.”
I would argue that this would make you less of a foreclosure risk especially in this market. Banks are businesses, sometimes people forget that. As a business do you want to foreclose on the house mortgaged to the hilt or do you want to foreclose on the house is only 20% or 50% of the value?
Did you look into or run the numbers using a side fund instead of paying down the mortgage? The numbers probably wouldn’t work for your second mortgage because of how aggressive you are attacking it but it might for your first. Similiar to a post I wrote http://evolutionofwealth.com/2009/09/15/your-mortgage-when-30-beats-15/

Matt Jabs September 19, 2009 at 12:47 am

As soon as we pay off our $11,000 Lending Club loan our 2nd mortgage is the next debt we plan to murder. We will take a similar approach to what you did and hope to have it paid off within 5 years at the most. It is around $40,000 right now, but shouldn’t be a problem as long as both of us keep our income streams alive!

Nice work on your 2nd mort repay.

Kevin September 19, 2009 at 11:58 am

Yea those income streams are mighty important 🙂

LAL September 19, 2009 at 8:50 pm

Sounds like a good plan, we did that with our first house. Put down 10%, HELOC 10% and tried to pay it off. We did pretty good, paid off 5% by the time we left. We did it at the expense of retirement savings, but unfortunately with my DH on a visa and not married, we could only save $2k/year in Roth IRA since I didn’t have a 401k at work. So it was the best option at the time.

Roddy October 8, 2009 at 10:18 am

Slightly off topic but still mortgage related. Any thoughts on paying cash for a rental property vs mortgaging it? What do you guys see as pros and cons?
Thanks.

Cancellation of Debt November 27, 2009 at 8:37 am

In a normal real estate market I am supportive of people paying down their mortgage, especially a second mortgage. But with real estate prices tanking I would generally advise against it. Of course it depends on which part of the country you live in, but just beware.

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